These slides explains what money is. Why money should not be saved in banks. Why banks are not evil, but we have given them too much money. Why paper gold will collapse. And Why US will get hyperinflation.

1. Evolution of Money and its
Implications
Anand Srivastava

2. Agenda
• Evolution of Money
• Money is Credit created by Debt
• Debtors and Savers
• The three functions of Money
• Deficits and Hyperinflations
• Gold and the financial system
• Some interesting charts
• Summary

3. EVOLUTION OF MONEY

4. Pre-Agriculture
• Nomadic Hunter Gatherer Tribes
• No individual concept of ownership
• Trade happened between tribes
• Inability to carry lots of stuff when moving
• They bartered for useful things
• No need for the money concept

5. Advent of Agriculture
• With Agriculture people could stay for long times in
one place.
• They could accumulate stuff.
• Stuff that wasn’t critical, but useful, or maybe just
frivolous.
• People began specializing in various tasks.
• There were people who were not creating food, and
needed to trade with others for food
• They also needed to trade among themselves
• Problem of non-coincidence of wants arose
• Various objects were used to act as the proxy of a trade
• These were the proto-money.

6. From Villages to Rulers
• Slowly people realized that they could use
somewhat rare items as a proxy for trade
• These items served as the Medium of Exchange, a
function of money.
• People started to covet these items more as
symbols of wealth.
• These items made people powerful, or people
used force to control these items to become
powerful.
• Slowly several villages came to be ruled by a
group of people.

7. From Rulers to Kings
• Rulers knew that these monetary items gave them
power.
• They slowly realized they could also create new items
to serve as money.
• They started to use metals or stones of sufficiently
rarity as coins.
• The currency created by the King was always more
expensive than the underlying metal.
• This prevented people from converting the coin into
the metal.
• The Kings also made a good profit from minting the
coins

8. Towards the war for gold
• The good kings made sure that they spent the
money judiciously
• The bad ones misused the money.
• They spent so much of it, that they ran out of the
gold/silver
• Then the stronger ones would attack their
neighbors to steal their gold/silver (eg British
control of India)
• The weaker ones reduced the amount of gold in
their coinage. (eg Romans towards the end)

9. Towards easier money
• The enormous spending of the rulers would get
easier if they could get more raw material for
their coinage.
• Silver was an easier money compared to gold
• China discovered the ultimate in easier money.
• They created the first paper and paper based
money.
• Slowly countries moved towards paper based
money in the 20th century.

10. MONEY IS CREDIT, CREATED BY DEBT

11. Money is Credit
• When you sell your services, it is not for
currency
• Currency is just the intermediate
• You want stuff and services that others
provide
• It is just a token of credit, that others accept
• But where did this credit arise.

12. Money is created by Debt
• The govt creates money when it pays for services,
salaries
• The govt doesn’t get the money from somebody
else before paying out.
• Obviously it is in debt of the services, salaries
• And the money is the corresponding credit
• This money goes back to the govt, via taxes, if the
budget balances
• Otherwise it needs to be sucked out via govt
bonds, sold to banks.

13. Banks create further credit/debt
• Money created by govt is called base money.
• Money created by banks is called credit
money, even though both are credits.
• Banks are restrained by something called
Reserve Ratio
• If the reserve ratio is 10%, they can loan out
90% of the deposited money.
• Banks can then inflate money supply upto 10
times.

14. Banks create money
• But that doesn’t mean it is wrong
• They must pay interest to the investors aka
depositors
• When you deposit money in banks, it is theirs.
You loaned it to them.
• If they lose it, you can lose the money, just like
in Cyprus.
• Savings accounts are investments.

15. DEBTORS AND SAVERS

16. Debtors
• Debtors consume more than they produce.
• Govt is always a debtor; it creates the money.
• In essence paying for everything with newly
created money.
• It gets the money back via taxation or issuing
debt bonds.
• People who expect the govt to give them some
money for nothing are also debtors
• Debtors prefer easier money, so that they can
inflate away their debts.

17. Savers
• Savers produce more than they consume
• Savers have left over income that they want to
save for their future and children
• They prefer harder money so that their
savings don’t get inflated away.

18. The Gold Standard
• The gold standard was a hard money system
• It worked well when govt was small
• It was adopted because there was no easier
money system.
• When Paper money was created gold standard’s
time was up.
• It still took a lot of time before the concept
caught up.
• People were not ready to take paper for their
gold

19. Last 100 years
• After the world war 1, the European nations
were in big problem.
• Their money needed to be devalued wrt gold.
• They took the easy way out, and chose US
Dollar as the money standard
• Reserve currency moved from gold to Dollars
• Initially Dollar was a gold standard, slowly it
got rid of the gold backing and became pure
paper.

20. Dollar as Money
• Now we live in a monetary system where dollar is the
reserve currency.
• For international trade you need this currency
• US got into debt to provide liquidity to the rest of the
world
• It allows US to go into infinite defict, as long as ROW is
consuming the excess Dollars
• Till 1990, before Euro, Europe was the consumer
• Till 2011 China replaced Europe
• Now there is no support, and the system is unstable

21. THE THREE FUNCTIONS OF MONEY

22. Medium of Exchange
• This is the most basic function of money.
• It is also the oldest function.
• It is the medium against which you can do direct
transactions.
• This is also called the Legal Tender, as the law of the
land backs this function.
• Due to the Legal Tender status, it doesn’t matter how
well it performs.
• During hyperinflations, the Legal Tender still works,
even though it is losing value very fast.
• During HIs everything becomes an MoE.

23. Store of Value
• This function is as old as MoE, as the first MoEs were SoVs
• The Store of Value must be stable in the long term rather
than the short term.
• This requires that it must not be controlled by any entity
• Store of Value and Unit of Account should not be the same
• Since MoE and UoA are same in normal times, and MoE is
the most liquid, so people tend to use the MoE as SoV.
• MoE and UoA are currencies, but SoV can be anything that
is perceived as wealth.
• These are rare works of art, antiques, precious gems and
metals.
• Basically things that have no other use.

24. Unit of Account
• This function allows you to measure the value of everything
• Requires that the UoA has a very stable value in the short
term.
• The stability requires that UoA can be created and
destroyed at will
• A Central Bank is required to monitor the money supply
• It must increase or decrease the supply as per need.
• The UoA cannot be stable in the long term, as people start
using it as Store of Value, sucking it out of the system
• Causing the CB to create more of it.
• Eventually the excess UoA will enter the market during a
crisis, causing unstability in value of UoA.

25. Why Gold and only Gold
• Gold is the premier Store of Value.
• Precious gems, antiques, rare work of arts, collectibles
are generally too expensive for normal people.
• Precious metals can be subdivided to very small
amounts so that they can reach the masses
• Of these Gold has the maximum capitalization
• And its industrial use compared to its above ground
availability is miniscule
• Silver has substantial industrial use at the present
times, which makes it useless as a Store of Value.

26. DEFICITS AND HYPERINFLATIONS

27. Budget Deficits and inflation
• When a govt spends more than it earns through taxes,
there is budget deficit
• Through budget deficit more money enters the
economy
• This results in inflation, as more money causes the
value of money to go down.
• To prevent inflation the money must be sucked out of
the economy.
• To do this the govt must issue debt instruments so that
banks and other entities invest in them
• Banks prefer them, because they are safe, and give
decent returns.

28. Debt matures spiraling out of control
• Debt instruments have an end date, at which
point govt must create more debt
• The govt is now adding new debt due to older
debt maturity and new deficit
• As debt grows, the interest on the debt
increases so much that it starts to overshadow
taxes.
• The govt must then reduce interest on the
debt, and soon it goes rock bottom.

29. Easy money allows govt to grow
• All This works well till the economy is growing, as people
are putting money in the banks
• When it stops growing as it eventually will, people stop
adding money but start withdrawing
• This puts a lot of stress on the banks, and puts pressure on
the govt to give money to banks
• During the growth period, due to reckless printing, govt
does much more than it should and becomes too big
• When the growth subsides, govt instead of reducing, tries
to mask the problem by growing
• Eventually the system becomes intractable
• The govt must print to save banks and must print to
continue its own expenditure

30. Too much money enters the market
• There is too much money in the system, although
it is tied up in debt instruments
• What prevents the system from crashing is the
trust in the stability of the system.
• Eventually the trust evaporates and this happens
nearly overnight.
• When you expect hyperinflation, its better to be a
decade early than to be a day too late.
• Overnight the rate of inflation gets out of control.
• Nobody wants the currency anymore.

31. GOLD AND THE FINANCIAL SYSTEM

32. Some facts about Gold
• There is about 170,000Tons of gold in the world
• Mines extract about 2500Tons/year
• Total Physical Gold trading 4500Tons/year
• Only 2000Tons out of 170,000 is available in the market
• Total Gold trading > 100,000Tons/year
• Rest of the trading is in gold futures, ETFs, and other
gold linked instruments
• Price of Gold is determined by Paper Gold Trading.
• Price of Gold is dropping because the demand for
Paper gold is going down
• Demand for physical goes up when price goes down.

33. Low PoG and Mining
• All in Mining Costs around 1400 USD/oz. This
means that mining is becoming unprofitable.
• Expect mines to close down soon.
• This would cause a severe physical supply crunch
• The demand in Asia will increase with the lower
price
• Eventually there will be no gold on the market,
for delivery against paper gold.
• Causing the Paper gold to become worthless.

34. Paper Gold and Shadow Banking
• Paper Gold is used as collateral in Shadow
Banking System
• By some reports the Shadow Banking system is
worth a few 100 trillion Dollars
• There is about 1.5Million Tons of Paper gold
• That would be more than 60Trillion Dollars
• If the paper gold becomes worthless, the whole
shadow banking system will crash
• Expect a world wide financial system meltdown

35. Financial system meltdown
• If the system melts down, we will have a banking
crisis
• US/UK/Japan, and countries that cannot save
their currencies will print and save their banks
• Eurozone and other countries that can save their
currencies will not print, and let their banks be
recapitalized from depositors money
• USD/GBP/JPY will become worthless
• International commerce will come to a stand still
as there will be no international reserve currency

36. Replacement of USD
• To restart a new international reserve will be required.
• The world will not accept another fiat currency as the
international reserve.
• No nation in their right minds will accept gold standard
again.
• Nations will move to a Euro like Gold as reserve policy, as
Euro would have proved its stability.
• Gold will be the only possibility for international reserve.
• BIS or the ECB will take steps to determine the real price
of gold.
• The new price will be 10-30X the present price of gold.

37. SOME INTERESTING CHARTS

38. US Base money increase

39. Gold Price Chart 10Year

40. Euro Reserves and Gold

41. Gold Brent Ratio

42. Mining Costs

43. World Mine Production

44. Wholesale Price Index in Weimar

45. Gold Reserve with Gold ETFs

46. Summary
• The current system is in its last death throes
• Gold was and is still the best Store of Value
• We are not going back to a Gold Standard
• Gold is going to be the future world reserve
• It is best to not save money in banks
• Save money as gold
• Invest in real companies as stocks
• Invest in Land, but don’t leave it unutilized.